The cash investment gives Citadel a 17% stake in ETrade. Earlier this month, ETrade said it would have to write down the value of its asset backed securities because of credit rating agency downgrades.

Citadel will purchase ETrade’s $3bn asset-backed securities portfolio which includes collateralised debt obligations and second lien securities for $800m. The deal will also give Citadel the power to nominate a representative to ETrade’s board of directors.

Layton has acted as a special adviser to ETrade’s board of directors for the past couple of weeks, according to a source familiar with the deal. ETrade is reshuffling its senior management in tandem with the investment in a move that propels Layton to chairman in a re-emergence of the former JP Morgan vice chairman.

An additional $150m investment is expected to go to ETrade by mid-January. BlackRock is also contributing money to ETrade.

Layton worked for JP Morgan for 29 years, on both the investment banking and retail divisions. At one time he was considered a possible candidate to succeed Bill Harrison for the chief executive position.

Layton was the head of Chase Financial Services, JP Morgan’s retail division, and had been expected to take a senior role following JP Morgan’s merger with BancOne when he decided to leave the company in 2004. As non-executive chairman Layton will tap his banking experience for duties that include assisting in the hire of a new chief executive and other staff hires. He will also be involved in risk management.

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Layton said: "Like anyone of my type, and I'm a type A person, I like being in the fray, I do like having a life and the challenge is good so in this situation I have a chance to balance that."

Jarrett Lilien was named acting chief executive of ETrade and replaces Mitchell Caplan, who will work as an adviser to the company through the end of the year. Lilien previously served as ETrade Financial's chief operating officer and has headed the retail business for the past four years.

Citadel has been seizing opportunities in the distressed market. In August, it purchased $500m in assets at a discount from money manager Sentinel. It acquired hedge fund Sowood Capital’s portfolio in July when it collapsed. Last year, it acquired a portfolio from Amaranth Advisors which failed after the hedge fund manager lost $6bn over bad bets on energy trades.